Despite the novel-coronavirus pandemic bringing countries to a virtual standstill, the stock market didn’t do so badly in 2020. Part of the reason for that is alternate-energy stocks, which had a huge year. Having said that, investors must be cautious in the current environment, as several stocks are trading at unrealistic premiums. One such name is Plug Power (NASDAQ:PLUG) stock, a hydrogen play that is up 99% in the last month.
Granted, I understand where all the positive momentum is coming from. This month, SK Group, the third-largest conglomerate in South Korea, invested $1.5 billion in Plug Power in order to expand its hydrogen footprint. It purchased roughly 51.4 million shares of Plug’s common stock at $29.29 per share as part of the deal, representing a 9.9% stake in the fuel-cell company. PLUG stock rose as much as 33% on Jan. 7 due to the announcement.
SK’s move is part of a larger initiative in South Korea to veer away from internal-combustion engines. South Korea’s President, Moon Jae-in, stated last October that the country will seek to achieve carbon neutrality by 2050.
SK Group runs South Korea’s biggest oil refiner. However, it has launched a task force charged with tapping the hydrogen sector. The company hopes to have hydrogen production capacity of 30,000 metric tons per year in 2023 and 280,000 metric tons per year by 2025. As a vertically integrated hydrogen-energy company, Plug Power will be able to help SK meet that goal.
It’s important to acknowledge, however, that PLUG stock is trading at rather steep multiples. It will take time before the company’s profits catch up to its lofty valuations. Moreover, analysts, on average, have a 12-month price target of $54.50 on the shares, a meaningful discount to their current price.
Apples and Oranges
Since going public in 2001, Plug Power hasn’t produced profits despite delivering consistent sales growth. But now investors are willing to look past all of that, as Plug has outperformed the S&P 500 by over 1400% in the past year. Alternate energy is all the rage these days, and any company that is part of the sector is growing by leaps and bounds.
In my previous articles, I have argued that solar and electric are the two fastest-growing niches in alternate energy, and I maintain that view. The SPDR S&P 500 Trust ETF (NYSEARCA:SPY), which tracks the S&P 500, returned 18.4% in 2020. In comparison, the Invesco Solar ETF (NYSEARCA:TAN), tracking an index of solar energy stocks, grew 234%, while the Invesco WilderHill Clean Energy ETF (NYSEARCA:PBW), tracking various types of alternative-energy stocks, increased by 205%. Meanwhile, the ETF which holds the largest number of PLUG stock is iShares Global Clean Energy ETF (NASDAQ:ICLN), with approximately 10.1 million shares. The ETF increased by 163.6% in the past year.
According to a report, the size of the global fuel-cell market is expected to reach $33.1 billion by 2027. Meanwhile, the global electric-vehicle market was valued at $162.34 billion in 2019 and is projected to reach $802.81 billion by 2027, registering a compound annual growth rate (CAGR) of 22.6%. So if you want to play the alternate-energy space, solar and electric-vehicle stocks are the way to go.
The Dawn of the Hydrogen Economy and PLUG Stock
Plug’s operating margin is the best among the three biggest players in the space; Bloom Energy (NYSE:BE) and FuelCell Energy (NASDAQ:FCEL) round out that group. Analysts, on average, expect Plug ‘s revenue to jump 36% next year and reach $1.04 billion in 2023. For a company that was spending $40 million per year on research and product development until recently, the prospect of earning over $1 billion dollars in 2023 isn’t too bad.
Plus, the company has a great deal of cash. In November, Plug Power raised approximately $1 billion of capital, bringing its total cash to $1.7 billion. And then less than a month later, it raised another $1.5 billion through its deal with SK Group. That puts its total cash at an enviable $3.2 billion, giving it a lot of money to build hydrogen plants.
A Niche Market Player at a Premium Valuation
PLUG stock is trading at a price-sales ratio of 61.4 times. Its shares are up 1,655% in the last year alone. Despite the positive news headlines and excellent growth outlook, PLUG stock is definitely overvalued.
In a recent note, JP Morgan analyst Paul Coster downgraded FuelCell to an equivalent of “sell” from a “hold.” Coster also initiated coverage of Plug Power, assigning it a “hold” rating. “Hydrogen pure-play stocks have outperformed the S&P 500 massively,” he wrote. He acknowledged PLUG stock as the “best in class,” but he advised investors to wait for a better entry point in the stock before buying it.
I couldn’t agree more. Investors should wait on the sidelines for Plug’s share price to drop.
On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.